Why aren’t burdensome cotton stocks pushing prices down?

It’s quite possible that global cotton usage is in perpetual decline. During the mid-2000s, annual global consumption peaked at more than 120 million bales. The global recession certainly affected cotton demand, as it did for most every commodity, but cotton lost market share to synthetic fibers as well.

The estimates for burdensome global inventories continue to inch up every month. The April USDA crop report revised 2012-13 ending stocks up to 82.45 million bales, or 76.8%, up from the 76.3% March estimate. As illustrated above, that stockpile should continue to grow in 2013-14.

Sounds like a great short? There are several reasons why it is not. Cotton has regained some lost market share to synthetics over the past two marketing years. The growth spurt for synthetic fiber vis-à-vis cotton has likely plateaued. While this in itself does not account for an appreciable increase in cotton usage, and the recent jump in U.S. sales does not guarantee that demand will return to mid-2000 levels, it is commensurate with the world’s slow climb out of recession.

Cotton usage could return to mid-decade levels. The evidence at the moment suggests that this is possible. We pointed out in our last article on cotton that despite the impression we get from headlines, China is not the only cotton customer. In notes accompanying a recent cotton report, the USDA points out that Indonesia, Thailand and Vietnam are importing record volumes of cotton this marketing year.

Even if acreage benefits from corn switching, U.S. cotton acreage is at its lowest level since 2010, which could make the market vulnerable. The uncooperative planting weather has slowed down cotton seeding as well. As of the most recent planting progress report, only 17% of the crop had been planted, down from 35% last year at this time and still well below the five-year average of 27%. The same vulnerability applies to the other key producers.

In the meantime, cotton prices are hovering well above historical highs. We’re still nursing a long-held long position with a stop at 77.5¢ per pound, basis December. Raise stops to 82.5¢, close only.